Labor Agency Has Tall Task Saving ESG 401(k) Rule Post-Chevron

The Labor Department needs to persuade a Texas judge that federal benefits law provides it with clear authority to promulgate its sustainable 401(k) investing regulation, after the Fifth Circuit sent a challenge to the rule back to the trial court.

Defending the 2022 rule, which makes it easier for retirement plans to consider factors like sustainability when selecting investments, will be tougher for the Department of Labor after the US Supreme Court eliminated a long-standing agency deference standard in Loper Bright Enterprises v. Raimondo.

Judge Matthew Kacsmaryk’s earlier decision to uphold the rule leaned heavily on agency deference under the scrapped Chevron doctrine. The US Court of Appeals for the Fifth Circuit sent the case back to Kacsmaryk after the high court ruling.

The next phase of the case will be a crucial early test of Loper Bright‘s impact on regulatory challenges.

The DOL previously told Kacsmaryk that it was entitled to deference under Chevron when the case was first proceeding in district court. It changed course when it argued on appeal that its sustainable investing rule closely adheres to the Employee Retirement Income Security Act, and doesn’t require the leeway previously afforded under the deference doctrine.

The agency now has to persuade Kacsmaryk without the benefit of that discarded doctrine, under which courts deferred to reasonable agency interpretations of silent or ambiguous statutes.

The group of more than two-dozen red-state attorneys general who brought the suit, and appealed Kacsmaryk’s initial US District Court for the Northern District of Texas ruling to the Fifth Circuit, argue that that the Labor Department violated the Administrative Procedure Act by issuing the rule. Their appeal zeroed in on the legality of its “tiebreaker standard” under ERISA.

The Labor Department may stay the course and argue it doesn’t need deference, including to uphold the standard, which allows plans to select one retirement investment over another based on “collateral benefits” when options are economically equivalent.

The agency can still rely on another high court precedent that calls on judges to give weight to agency stances according to their persuasiveness, known as the Skidmore doctrine.

“The one big thing that wasn’t in their Fifth Circuit brief that might become more of a factor after Loper Bright is Skidmore deference,” said Danielle Desaulniers Stempel, a senior associate at Hogan Lovells LLP. “Many of the arguments DOL made feel Skidmore-ish, they talked a lot about history and consistency and the formality involved, and those are factors courts traditionally look to under Skidmore.”

Emphasizing the few scenarios where the tiebreaker standard applies could also bolster the Labor Department’s argument on remand, signaling to Kacsmaryk that another ruling in the agency’s favor wouldn’t have widespread impact on the way fiduciaries handle retirement plans.

The attorneys general who filed the suit raised concerns that fiduciaries could use that aspect of the rule to push their interests on plans instead of pursuing returns for retirement savers, according to Desaulniers Stempel.

“When a court is concerned about a rules operation, emphasizing that it’s really only kicking in on the margins and isn’t going to affect the vast majority of cases is a way of reassuring the court, because it means that anything they do is necessarily more narrow and more limited,” she said.

Spokespeople for the Labor Department and Justice Department declined to comment on the litigation.

Turning to Skidmore

The Labor Department “presciently disclaimed” its past reliance on Chevron in an appeal brief, Fifth Circuit Judge Don R. Willett said in the opinion sending the case back to Kacsmaryk.

Anticipating that the Supreme Court would rule to undermine that form of deference, the agency abandoned a Chevron-based argument to support the rule, but left Skidmore on the table as an alternative.

“We may see courts, whether they call it Skidmore or they’re just sort of talking about it in terms of the realities of the world, letting that agency expertise bleed into the analysis to some degree, especially where the text is silent on the issue,” Desaulniers Stempel said.

Skidmore allows courts to use persuasive agency interpretations as guidelines to support informed judgment, rather than simply deferring to agencies, as judges did under Chevron.

“People have long been skeptical that Skidmore does any independent work, because if you’re already persuaded you can just say Skidmore,” Desaulniers Stempel said. “Skidmore might be something that courts use to justify their decisions more, but I don’t know how much independent value it will have in the decisionmaking framework.”

If the DOL is looking to sway Kacsmaryk on Skidmore grounds, they would likely need to mention the doctrine explicitly and attempt to persuade the judge that their interpretation fits the statute, according to Desaulniers Stempel.

DOL is likely to revisit arguments that the rule, including the tiebreaker standard, fits squarely within the realm of fiduciary considerations under ERISA, according to benefits lawyers.

There is a chance that the absence of a clear deference standard through Chevron, and the widespreaduncertainty that judges would be swayed by an argument based on Skidmore, would leave the agency with only the text of the statute itself as an avenue to keeping the rule afloat.

“All these things will play into their arguing that they don’t deserve deference, but that this is the best interpretation of ERISA, and that it’s fully consistent with ERISA,” said Joanne Roskey, a member of Miller & Chevalier’s employee benefits practice.

Deference in Doubt

Kacsmaryk’s initial ruling indicated that he was open to the arguments put forth by the red states and that he relied predominantly on Chevron in upholding the rule itself, a decision that surprised those who otherwise saw his court as a venue ripe for overturning Biden administration rulemaking.

“In a footnote he said, ‘while I’m sympathetic to plaintiffs’ arguments here, I’m stuck with Chevron unless and until it’s repealed,’” said Julie Stapel, partner at Morgan Lewis & Bockius LLP. “So I think that’s sort of a tell that it’s probably going to be a hard road for the DOL on remand.”

The DOL appears poised to argue, as it did in the Fifth Circuit, that ERISA includes environmental, social, and governance considerations as factors material to financial performance that can be weighed in investment decisionmaking.

ERISA explicitly permits fiduciaries to consider collateral factors—that is, factors unrelated to risk and return—under tightly limited circumstances, the agency has argued.

The Labor Department has long posited that ESG factors may be directly related to the economic value of a retirement plan, even prior to its most recent rulemaking efforts.

“If I were the DOL, I would argue there’s no need to defer, but that the notion central to this rule is that ESG factors are indeed appropriate considerations among many when a fiduciary is making investment decisions, “ she said. “I don’t know if any form of deference is going to stand up anymore, they did Chevron first, but I would worry about putting too many eggs in a basket that depends on any other kind of deference.”

The case is Utah v. Su, N.D. Tex., No. 2:23-cv-00016.